As an emerging economy faced by increasing financial challenges from climate change, limited transportation network, inadequate water systems and energy shortage, the current economic recession and reduction in main sources of revenue has plunged the country into limited resources to meet development needs. Nigeria is in need of urgent, creative and responsible approaches to mobilize resources for sustainable development. This is why the Green Bonds are a welcome development.
Recently launched by the Federal Government on April 5, 2017, the green bonds initiative is a development trajectory towards the economic recovery and growth plan needed to revamp the economy. This development strategy seeks to diversify the economy; attract new investors, hence, mobilise liquidity to revamp the economy coupled with responsible actions towards the environment. This implies that the Green bonds are geared towards articulating economic growth with the targets of USD10billion per annum in the Nigerian NDCs (Nationally Determined Contributions).
Generally, bonds are debt instruments issued by governments or businesses. Green bonds, therefore, describe debt instruments exclusively issued to finance projects that promote environmental sustainability or address climate change mitigation and adaptation, for example, in renewable energy, sustainable waste management, sustainable land use (forestry and agriculture), biodiversity, clean transportation and clean water. Interestingly, this aligns with the priority areas of the newly launched economic recovery and growth plan by the Federal Government. The diversification plan targets a growth rate of 7% by 2020 driven by strong non-oil sector growth anchored on agriculture and food security, energy, transportation and industrialization.
The Reality of Revamping the Nigerian Economy
According to the Federal Ministry of Environment, the green bonds will enable capital-raising and investment for new and existing projects with environmental benefits. The initiative is in consonance with the concept of Sustainable, Responsible and Impact Investing (SRI) which puts into consideration the Environmental, Social and Corporate Governance (ESG) criteria in investment analysis to generate long-term competitive financial returns and positive societal impact.
Green bonds are proven, excellent tools to raise large amounts of financial resources to support environmental projects and bridge the gap that higher interest rates and unattractive bank loans have created in capital intensive projects like renewable energy installations such hydro, solar, wind, and geothermal power. Practically, many “green” projects have been funded in whole or in part by World Bank Green Bonds. Three notable examples of such projects in Africa are the Fourth Northwest Mountainous and Forested Areas Development executed in Tunisia, which is expected to impact 318,000 people, the water investment project which would supply 10,000 households with drinking water (World Bank Treasury Green Project in Tunisia) and the Noor-Ouarzazate Solar Plant in Morocco– world largest concentrated solar plant.
Furthermore, green bonds have been utilised in boosting and revitalising emerging economies in addition to building energy efficiency. African Development Bank’s Green Bond (AFDB) issuance for instance was instrumental in kick-starting the first phase of the world’s largest concentrated solar plant in Morocco whilst it has created thousands of direct jobs across the continent. Similarly, South Africa’s City of Johannesburg Green Bond issuance/projects have attracted investors and advanced new technology and introduced environmental solutions to the city – strengthening the economy and building a more resilient, sustainable, and liveable city.
Generally, as in the case of other bonds, a green bonds market enhances greater flexibility and more options to exit the investment for project equity and longer-term project finance debt held by banks constrained by deleveraging and regulations. In this way, green bonds can help to increase the speed at which capital can be “recycled” back into development in Nigeria whilst attracting investors, revitalising the economy, and improving the lives of the people.
The Green Bonds issuance is expected to strategically support the Federal Government’s commitments towards the diversification of the economy and deepen the capital market. Rachel Kyte – the World Bank Group Vice President and Special Envoy for Climate Change noted that: “Green bonds have opened a new finance flow that will be essential to confronting climate change. They are providing green investment opportunity for an ever wider investor group, including those who wish to divest and diversify from fossil fuel-intensive portfolios, and they have proven that a stream of investor capital exists for green assets.” We can therefore infer that green bonds have the capacity to advance the diversification of the fossil fuel-intensive portfolios. It also has the capacity to advance the adoption of innovative new technologies, finance projects that provide new jobs, and promote economic and climate resiliency.
Moreover, investors are increasingly demanding socially responsible investment (SRI) opportunities and have expressed a strong appetite for green bonds by repeatedly oversubscribing issuances. As a result, green bonds issuances in Nigeria will attract new types of investors, providing a potential market for future issuances. These potential investors include international financiers with large asset base such as pension fund managers, asset managers and sovereign wealth funds. Among other developments needs of the country, green bonds have the capacity to address the power deficit by providing finance required for investing in renewable energy projects and improving the quality of life through job creation.
But can a shift to non-oil based assets such as Green Bonds leapfrog economic growth and diversification as expected in Nigeria?
The answer lies on the integrity of governance system; the success or failure of any plan rests on the quality of its implementation. Though laudable, the Green Bond strategy is susceptible to flop within a highly corrupt system where the objectives of the initiative could be compromised.
Transparency and Proper Utilisation of Proceeds
Transparency in the “use of proceeds” is the key to integrity in this case.
The foundation of the green bonds market lies in the proper utilisation of the proceeds of the bonds on projects that provide quantifiable environmentally sustainable benefits. However, lack of consensus regarding what constitutes a green bonds is a major risk associated with harnessing such long-term investment option. For example, The EDF Group, which provides home and business energy in the U.K., operates nuclear power plants as a green project in France and Britain and recently issued a €1.4 billion green bonds towards nuclear energy. But is investing in nuclear power really green? This is debatable.
Partnerships and Collaboration with the Private Sector
According to Amina Mohammed – the current Deputy Secretary-General of the United Nations and a former Nigeria Minister of Environment, “improved partnerships and collaboration with private sector is (another) key” towards accelerated economic growth supported by green bonds initiative. Such partnerships enable the government to derive gains that might accelerate the pace of green investment from the expertise of the private sector; leading to the adoption of new technologies. Government should adequately partner and engage the private sector, bringing together skills and resources that can help in distributing the share of challenges and responsibilities among all stakeholders.
The launch of the N20 billion green bonds is therefore a milestone towards the leadership of sustainable and responsible investment in African where the approach is yet to be fully exploited.